South Africa’s middle class is getting crushed

 ·4 Sep 2023

South Africa’s middle class increasingly cannot afford secured loans – or are defaulting on loans they have – as the ongoing challenging economic environment continues to add strain to monthly budgets.

This is one of the key findings from the latest Credit Stress Report by Eighty20, in collaboration with Xpert Decision Systems, which looked at credit behaviours during a challenging second quarter of the year (Q2).

The quarter faced several headwinds, such as inclement weather, US allegations that South Africa supplied arms to Russia (now officially refuted and dismissed by government), and the rand crash.

Across most credit metrics, the number of defaults and overdue balances continued to increase against the backdrop.

The change in the Rate of New Default (RND) – which is the percentage of current loan balances that went into default in the quarter relative to the same quarter a year prior – for all loans was up 29.2%.

This was the third consecutive quarter of double-digit increases, following a CRND of 15.6% in Q4 2022 and 17.4% in Q1 2023.

Home loans, especially, declined, with the CRND for home loans going up 52%, as there was a 29% annual increase in average mortgage instalments.

Only one quarter ago, the CRND for home loans was at 28%, with a 2% annual increase in average mortgage instalments.

“This situation is particularly prevalent for the top 5% of South Africans who have 75% of all home loans by value. Within the Eighty20 National Segmentation, the wealthier Heavy Hitters segment have a CRND for home loans at 61%, VAF at 25%, with Credit Card up to 23%,” said Andrew Fulton, Director at Eighty20.

Financial reports from the banking sector have also noted similar concerns, with Standard Bank, Absa, Nedbank and Capitec all noting an increase in credit impairments. The worst of which was African Bank, which noted that impairment charges on loans and advances grew by 240%.

Credit Extension Growth

“Whether due to individuals scaling back on the number of loans they hold or defaulting on their loans, there has been a consistent reduction in the number of secured loans held by certain customer segments,” Eighty 20 said.

Loan values have increased over the last decade despite a decade-long trend of declining rates of new credit-market entrants.

Although the number of credit-active individuals is approximately the same as it was four years ago, the value of loans has increased by a compound annual growth rate of 5.4% over the period.

Looking across the various segments, the Heavy Hitters – the wealthiest 5% of the population – have taken on more secured credit in value and volume since 2019.

However, the opposite is happening with South Africa’s middle class – those who earn R15,000 pm (household income of nearly R25,000), with the segment struggling amidst the high-interest environment.

The estimated instalment-to-income ratio for the middle-class segment is 73%, which is up 10% year-on-year and the highest of all segments.

Over the last year alone, the number of those with secured credit dropped by 700,000 with home loans (down 4% YoY) and 604,000 with VAF (down 9% YoY).

“Those who have loans are struggling to pay them off – with 51% and 30% increases in RND for home loans and VAF, respectively,” Eighty20 said.

In addition, the Mass Credit Market – those with a personal income of just over R5,000 per month – have also decreased the amount of secured credit products that they have over the last two years, but the value of these loans has remained largely stable.

Top = Mass Credit | Bottom = Middle Class

Not all gloom and doom         

However, Eighty20 said that there have been some positives, especially in the Western Cape.

Regarding home loans in default, the Western Cape has the lowest in South Africa at 2.2% of home loans granted since 2020 going into default, which is lower than the national average of 3.3%.

“Semigration has likely contributed towards the value of all home loans in the Western Cape increasing by 67.5% since 2019 Q3, while the value of the average home loan has gone up 26%, more than any other province,” Eighty20 said.

Between Q4 2020 and Q4 2022, there was a significant rise in Heavy Hitters taking out home loans each quarter, especially during the periods of low interest rates.

In the Western Cape, new home loans for this segment reached its highest point in Q3 2021, with nearly 5,500 new loans – a nearly 75% increase compared to Q3 2019.

However, due to consistent interest rate hikes over the past 18 months, that number has now decreased by 32% from its peak.

“Although this trend has also been visible across all provinces, the proportion of Heavy Hitters taking out mortgages in the Western Cape now compared to four years ago has gone up 10%, compared to a decrease of 5% in Gauteng,” Eighty 20 said.

Looking beyond the Western Cape, the drop in consumer price inflation to 4.6% in July increases the possibility that SARB will keep interest rates on hold, with drops expected from Q1 2024.

The private sector is also working with the government to tackle the energy, logistics and crime crisis.

“And reflecting on the Western Cape’s positives, perhaps this sleepy province could lead the country out of the doldrums,” Fulton said.

Read: SARS can kiss R82 billion goodbye

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